This is another one of those ideas that seem obvious to me now, but didn’t always — and I keep hearing from entrepreneurs that it’s new information to them, which tells me I should write it down.
Chris Dixon is one of the most articulate entrepreneur / investors I know of on the many risks of seed-stage fundraising. His post “Once you take money, the clock starts ticking” covers most of the ground I want to, but with one important omission: fundraises aren’t actually discrete, time-separated events; instead, they behave more like, and should be actively planned, in pairs.
Every capital raise contains implicit assumptions about the next one. The more explicit you make those assumptions — both to investors and to your team — the more likely you are to get that next raise done.
Why is this so?
Almost by definition, venture-backed companies consume capital. The more successful they are, the more capital they consume as they rocket (hopefully) to a position of dominance in the market they’re targeting.
Despite cyclical variations in pricing or deal mechanics, the steps in the fundraising process look pretty much alike from one company to the next:
If your company is on a venture path and you’re raising anywhere within this trajectory (i.e,. you’re consuming capital much more quickly than you’re generating free cash flow), every raise comes with a set of assumptions about:
- (a) how much time you’re buying until the next raise (18 months is a good rule of thumb, and
- (b) what you expect to accomplish within that time.
If you don’t understand — and fundamentally share — those assumptions, you and your investors are very likely to wind up at odds over your next raise.
For example, if you’re raising a Seed round today and expect to raise an institutional Series A within 12-24 months, you need the current raise to buy yourself enough time + capacity to:
- build a product customers actually want,
- figure out how to sell it to them, and
- develop a credible hypothesis for how those product / customer pairings can be acquired at scale with positive (and ideally accelerating) margins
But the next best strategy is to fully grok the benchmarks that both current and next-round investors are planning to use to evaluate you, and make sure you raise enough / hire enough / accomplish enough to make the cut.